Fundrise Review 2018

February 15, 2018

When first established in 2012, Fundriseoffered individual real estate deals. Developers could apply for loans through Fundrise, and if approved, individual investors could invest in each project directly.

This structure had a major drawback – all investors had to be accredited. Non-accredited investors (most people) were unable to participate in any real estate deals.

Fundrise recently overhauled their entire investment platform. Instead of focusing on individual real estate projects, Fundrise is now offering proprietary “eDirect” real estate investments in accordance with Regulation A+ of the JOBS Act. This regulation allows Fundrise to raise up to $50 million (per investment offering) directly from investors, whether accredited or not.

Fundrise Real Estate Investments

The available Fundrise real estate investments include eREITs and eFunds.

An eREIT (electronic Real Estate Investment Trust) is a professionally managed, diversified portfolio of commercial real estate assets, such as apartments, hotels, shopping centers, and office buildings located across the country. Similar to an ETF or mutual fund, an eREIT allows you to diversify across many real estate properties at a relatively low cost with minimal effort.

The Fundrise eREIT(s) function much like traditional REITs. Investors buy shares of the eREIT, and the eREIT uses that money to make investments in commercial real estate. The eREIT then earns income from property appreciation, rent payments, and interest on real estate debt, which is later distributed to shareholders.

An eFund is a professionally managed, diversified portfolio of residential real estate assets, such as single-family detached homes, townhomes, and condominiums tailored to first-time, move-up and active adult homebuyers. Similar to the eREIT offerings, eFunds allow you to invest in a diversified group of residential real estate assets.

Fundrise is now offering several different eREIT and eFund investments, which are discussed below.

Income eREIT

The Fundrise Income eREIT is focused primarily on making debt investments in commercial real estate assets that generate steady cash flow.

To date, the income eREIT made 16 investments in properties located throughout the United States.

The current annualized dividend is approximately 10.5% (net of fees).

Growth eREIT

The Fundrise Growth eREIT is focused on acquiring commercial real estate assets that have the potential for appreciation. The goal is to provide moderate income while offering the potential for long-term growth in the price per eREIT share.

The Growth eREIT owns seven large apartment complexes located throughout the United States with more than $10 million in renovations underway.

The current annualized dividend is approximately 8% (net of fees).

West Coast, Heartland, and East Coast eREITs

These eREITs provide a balanced approach to investing, with the overall investment objective including both income and growth.

Each of these eREITs is based on geographical location:

West Coast: Aims to invest in commercial real estate assets located in the Los Angeles, CA, San Francisco, CA, San Diego, CA, Seattle, WA and Portland, OR metro areas.

East Coast: Aims to invest in commercial real estate assets located in Massachusetts, New York, New Jersey, North Carolina, South Carolina, Georgia, and Florida, as well as the Washington, DC, and Philadelphia, PA metro areas.

The current annualized dividend for each eREIT is approximately 8.5% (net of fees).

Los Angeles, Washington D.C., and National eFunds

Fundrise offers three eFunds, which differ by geographical location. Each eFund plans to acquire residential properties for the development of For-Sale Housing. The primary goal is to target debt and equity investments in homes, townhomes, and condominiums in each geographical location. Fundrise plans to develop and sell the residential housing properties, creating revenue that will be distributed to eFund shareholders.

Investment performance is not yet available because each eFund has made limited investments to date. I will update this review when data is made public.

Underwriting and Evaluating Real Estate Properties

Fundrise follows a “value investing” strategy, meaning they only purchase real estate assets if the acquisition cost is less than the intrinsic value (i.e. replacement cost).

The goal is to acquire real estate properties at an attractive price and then add value through renovation, partnerships, and strategic positioning. After improving the existing property, Fundrise then collects revenue through interest payments, rental income, or profits from a potential sale.

Each Fundrise investment property must meet strict underwriting standards in four key areas:

Loan Sponsor Analysis: Each loan applicant must pass a credit and background check, and must submit detailed information about prior loans, track record, and experience.

Market Analysis: Each property undergoes a supply-and-demand analysis, on-site reviews, and comparison to other local properties.

As a result of this process, Fundrise reviews more than 2,500 potential real estate deals each year. Of those, approximately 1% are approved for investment.

FundRise eDirect Real Estate Platform

The Fundrise eDirect platform is designed to be a fully automated investment solution, allowing users to review and invest in private-market real estate assets while providing comprehensive accounting and reporting through the online dashboard.

Fundrise offers three different diversified strategies to choose from, and each strategy differs with respect to the underlying real estate holdings.

1) Supplemental Income:

Designed for investors who are looking to create an additional passive income stream, the income portfolio includes a large allocation to income producing eREITs.

The projected performance is driven largely by annual dividends.

2) Balanced Investing:

Designed for investors who are looking to maximize diversification, the balanced portfolio includes an equal allocation across all eREIT and eFund investments.

The projected performance is driven by a combination of dividends and appreciation.

3) Long-term Growth:

Designed for investors who are looking to maximize their total return and who many comfortable with moderate volatility, the growth portfolio includes a larger allocation to the growth eREIT and eFunds (and a smaller allocation to the income eREIT).

Reviewing Your Fundrise Investments

I have investment accounts scattered across multiple financial institutions, and I can confidently say that the Fundrise user experience is the best that I have found.

When you log into your Fundrise account, your investment dashboard is displayed. Here you will find your account balance and a detailed overview of your real estate holdings.

The colorful graph and letter ratings are designed by Fundrise to explain the risk of each investment.

Fundrise uses a rating system ranging from A to E, allowing investors to easily compare different assets across their portfolio. The Fundrise rating system is meant to be objective and is driven by factual information about the investment — for example, whether an investment is “stabilized” or undergoing “ground­ up development.”

Within your dashboard, you can select any of the investments to read a professionally designed investment summary.

For example, when I select the Jacksonville, FL apartment complex the following information is displayed:

If you continue scrolling down the page, you can read a detailed investment summary and view the exact location of the property.

The whole experience is intuitive, informational, and beautifully designed.

Fundrise Liquidity

Liquidity is the ability to turn an investment into cash, and the Fundrise private-market approach is fairly illiquid.

Because Fundrise relies on investor capital to make deals, the company wants to partner with long-term investors, not individuals looking to speculate or trade frequently.

Fundrise provides a five-year liquidity schedule.

Investors can liquidate their shares on a quarterly basis, but the redemption value varies by holding period. If you expect to sell your Fundrise shares in the first five years, you will take a small loss during the redemption.

Fundrise Taxation

Depending on your Fundrise portfolio, you might receive income from an eREIT and/or eFund. In general, both forms of income are tax inefficient.

By law, (e)REITs must distribute more than 90% of all earnings to shareholders. The dividend payments from Fundrise are taxed as ordinary income and are reported on tax form 1099-DIV each year.

Income from eFunds is also taxed as ordinary income because the underlying tax structure is a partnership. Any income that you receive will be reported on tax form K-1.

Investors can easily open a taxable brokerage account through Fundrise, but all income will be taxed as ordinary income in the year received. The Fundrise Dividend Reinvestment Program “DRIP” allows you to automatically reinvest any dividends to purchase additional shares of each investment, but taxation remains the same. Dividends are always taxed in the year received, whether taken as cash or reinvested.

Fundrise investors can also choose to open an Individual Retirement Account (IRA) through Millennium Trust Company, where all dividends would be sheltered from taxation. The IRA carries a $75 annual fee per Fundrise investment held in the account.

Fundrise Performance

To date, Fundrise has completed more than 100 real estate investment deals worth an approximate $1.2 Billion. These investments have returned almost $20 million to investors.

In the chart below, you will see the cumulative dollar return and the annualized returns.

The annualized returns are net of fees. This is the actual return paid to investors.

Fundrise invests in private-market real estate offerings. Unlike publicly traded REITs, which act primarily as holding companies for assets that have already been acquired, Fundrise is similar to a private equity fund that originates, underwrites, negotiates, and closes on debt and equity investments.

This is an important distinction because Fundrise expects their private-market dealings to generate an ongoing return premium, allowing the company to outperform publicly traded alternatives. For more information on this topic, you can read the latest Fundrise research paper.

Fundrise Fees

Fundrise charges 1% of assets under management annually. The fee is broken down as follows:

The asset management fee covers the ongoing operation and oversight of the real estate properties in your portfolio, including the accounting, construction, financing, zoning, sales, and marketing of all properties.

There are no transaction fees or sales commissions applied to any Fundrise offerings. All reported dividends and returns (shown in a previous section) are net of fees.

Fundrise Review Summary

If you are looking to invest in private-market real estate deals from the comfort of your home, Fundrise is a great option. The platform is intuitive and easy to navigate, and the investment performance has been impressive to date.

Disclosure: I have several thousand dollars invested in most of the eREIT offerings covered in this review, and have no plans to sell my shares.

Fundrise Review 2018

Summary

Through Fundrise, anyone can invest in diversified private-market real estate projects. The platform is outstanding, the fees are reasonable, and the investment performance has been impressive to date.

I’ve always been interested in starting my own real estate profile. It seems like they’re really great with walking people through the process and answering all the questions.

Reply

October 4, 2017 9:03 am

Mark

From reading this it appears that all goals contain the eFunds and from reading the Fundrise FAQ, it appears that eFunds possibly require filing taxes in their states (CA and DC from the ones they have so far). Can you comment on if that is the case an how that works? Or can you setup a goal but have it not use eFunds at all, just eREITs? This looks like a fascinating way to start investing in Real Estate (and generate some extra income), but the thought of having to file multiple extra tax returns is rather annoying. Thanks!

Reply

September 24, 2017 5:35 pm

Jacob Lumby, PhD

Hi Mark, I’m not sure what you are asking here. If you have to file a federal and state income tax return, Fundrise mails you the relevant tax information that you input when filing your return. You don’t file anything separately through Fundrise.
Regarding the available investments, you can manually invest in any eREIT or eFUND at any time without using their goal-based recommendations. Those recommendations are simply a way for most investors to get started with a diversified real estate portfolio.

Reply

September 26, 2017 4:08 pm

Mark

Thanks!
That’s basically what I was asking.
It appears that the eFUNDs possibly require you to file taxes in the states they hold properties in along with your normal local state taxes, while eREITs don’t require that.
Knowing that I can build a portfolio of only eREITs makes me much more likely to try it out!

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September 27, 2017 6:19 pm

Jacob Lumby, PhD

No problem! Just to clarify for you, the eFunds will only require that you file a return within your State of residence. Doesn’t matter if the funds hold properties in other States.

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October 4, 2017 7:14 pm

Grant

Fundrise has a great product. They seem really professional and like they know what they’re doing

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September 20, 2017 12:46 pm

Beth

Great review. My biggest concern is the evaluation of properties in the investments (thinking of the mortgage crisis and the abandoned houses making up the bundled investments banks held). Do you have any insight on this having used the product? How are they mitigating the risk that they could expand too fast to properly vet/diligence new properties?

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June 27, 2017 8:53 am

Jacob Lumby, PhD

Hi Beth,
I include the underwriting information in the review, which explains their methodology for investment. Having been invested for almost two years, I can tell you Fundrise approves a small number of properties for investment and provides a detailed report every time a new investment is made. They put a lot of effort into the underwriting process because they want this to be sustainable over the long run. Time will tell.

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June 27, 2017 10:33 am

Chris

I wonder how the rates will look in times of slower real estate growth. They are definitely benefiting from only being in existence during a time period that has seen solid growth for real estate investments as a whole

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June 21, 2017 5:39 pm

Jacob Lumby, PhD

Hi Chris,
The last 10 years has been very good to all asset classes, not just real estate. Financial markets are always cyclical, and I would anticipate periods of exceptional growth and periods of stagnation. Time will tell how Fundrise performs when markets are less favorable.

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June 21, 2017 9:06 pm

Justin

I have been using FUNDRISE for almost 2 years now and so far have been getting a consistent 10%….I am not an avid investor, or into any kind of investment I have to babysit. Fundrise is incredibly simple, and each dividend I get makes me put more and more into it. I bought some of their private IPO, and even re-investing my dividends to grow my account. I would love to hear other peoples experiences with it….I have yet to have any kind of negative experience with them. I am even considering throwing even more into it….am I crazy?

Reply

June 17, 2017 10:01 am

Usman Ansari

You mention that Fundrise has had good results thus far…what have been the returns on their older eREITs?

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December 11, 2016 8:26 pm

Jacob Lumby, PhD

I provide the return details in the review, and I will continue to update the review when applicable.

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February 15, 2017 4:02 pm

Marc

So if a quarterly redemption results in a “less than full value” amount to the investor, how long is the minimum investment term in order to redeem your shares at full value? Are there redemption fees of any kind? Thanks for a very informative article.

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November 13, 2016 10:03 pm

Jacob Lumby, PhD

Hi Marc,
I’ve updated the review to reflect the redemption schedule.

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November 14, 2016 6:48 pm

Gene

I’ve been observing the new real estate crowdfunding companies, and agree with your assessment in this review. Fundrise appears to offer the best investment opportunities for non-accredited investors at the moment. Others will likely offer something similar within the next 1-2 years.

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November 6, 2016 11:28 am

Jacob Lumby, PhD

Thanks for the comment Gene. I think you’re right, other firms will likely follow suit and offer something that can compete with Fundrise for non-accredited investors. But that hasn’t happened yet.

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November 6, 2016 11:32 am

Roger

Great read. I was esp. wondering about liquidity. Regarding other investments, you can check out Groundfloor. Very minimal investment needed and can be non-accredited. You invest directly in a given real estate project.

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November 3, 2016 9:33 am

Jacob Lumby, PhD

Fundrise used to offer individual property deals, but the eREIT structure provides better diversification, which should result in less idiosyncratic risk in your portfolio.

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November 6, 2016 11:31 am

GFY

Very interesting! I had not yet heard of Fundrise. This is an area I’ve wanted to invest in but have been held back by most companies requiring accredited investor status. Thanks for the review. I will definitely check this out!

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October 27, 2016 2:03 pm

Jacob Lumby, PhD

Glad you found the review useful.

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November 14, 2016 6:55 pm

Tim

Thanks for another great review. Fundrise looks promising, but I share the concerns you highlight in the review. Do you think there are any better alternatives in the real estate crowdfunding space?

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October 24, 2016 1:26 pm

Jacob Lumby, PhD

I’ve checked out several other companies in this space, and believe Fundrise is the most promising. Many other firms still require accredited investor status, and offer individual real estate deals instead of the eREIT structure.

Reply

October 24, 2016 1:27 pm

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